Inside the Market’s roundup of some of today’s key analyst actions
Following its disappointing initial public offering and subsequent share price slide, investors finally got a broad look at the Street’s view of Uber Technologies Inc. (UBER-N) on Tuesday as a large group of equity analysts initiated coverage of the ride-hailing service.
Almost two dozen Wall Street banks underwrote the company’s May 9 market debut, leading to a mandated delay in the unveiling of their ratings and target prices for its stock.
Here’s a look at some of analysts’ views:
Canaccord Genuity’s Michael Graham gave Uber a “buy” target and US$55 target.
Mr. Graham: “Uber is perhaps the best exemplification of the modern private equity-enabled tech sector unicorn, having been supported through years of private operation, raising $24.7 billion pre-IPO, and entering the public markets with an $82 billion valuation. The stock essentially flat following an 18-per-cent decline from its IPO price of $45 as public investors have for now eschewed the long period of loss making implied in Uber’s business model, and it’s quite possible that the stock may experience an extended ‘seasoning’ period as it works through pent-up supply from early investors seeking partial liquidity. In addition, the scope of Uber’s investment and expansion framework virtually ensures delayed profitability for several years, narrowing the pool of potential buyers. All that said, we are bullish on the stock as we see the vast global transportation market as poised for disruption, and Uber as the dominant player in the revolution.”
RBC Dominion Securities’ Mark Mahaney initiated coverage with an “outperform” rating and US$62 target.
Mr. Mahaney: “Uber is the leading global player in massive ridesharing & meal delivery TAMs [total addressable markets], generating robust growth, with leading technologies, products & ops. We also see significant option value in new business units (e.g. Freight). We believe the market underappreciates UBER’s profit potential.”
Citi’s Mark May gave it a “neutral” rating with a US$45 target.
Mr. May: “The Uber app is used every month by nearly 100 million people in 63 countries to get rides, food and packages. The company has been a transformative and disruptive force like few companies before it. And despite its rapid growth and the scale achieved, the opportunity in transportation services is still significant. However, forecast uncertainty has been created from 1) a recent rise in competition (and capital) in certain markets, 2) regulatory pushback and uncertainties in some markets, 3) potential limits on penetration levels at current price points and network capacity, and 4) determining if AV represents an opportunity or risk. Despite these risks, we still forecast Uber producing $38-billion in revenue in four years (27-per-cent CAGR) and a 25-per-cent EBITDA margin in 10 years.”
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While the Street’s look at Uber was highly anticipated, several analysts took the opportunity to also initiated coverage of rival Lyft Inc. (LYFT-Q).
Touting its “attractive risk/reward in the race for networked mobility,” Citi analyst Itay Michaeli gave San Francisco-based company a “buy” rating with a US$70 target.
“Readers of Citi’s past Car of the Future body of work know that we have long-viewed the network effect as the most coveted asset in the entire mobility race, in what will likely prove to be a few-regional-winners-take-all outcome,” he said. “We’re sitting in the early-innings of a transition that we believe is likely to upend the current personal mobility value-chain —resulting in lucrative addressable markets (of various forms) for the network winners. We view Lyft to be well-positioned to participate in this LT upside proposition, and we like the company’s concentrated focus (U.S./Canada, rides) and net cash position in what can be a volatile industry.”
“Our base case ($70 target) leverages our newly introduced U.S. Rideshare TAM model, which forecasts a ~$150 billion 2030E industry revenue pool. Importantly, this base case doesn’t contemplate a major shift in car ownership or the deployment of AVs, which could unlock a far greater TAM. When contemplating such upside, we think the LT “bull” case for the stock is arguably $211. Of course, AVs also add competitive risk, which we discuss in detail in this report, but we think Lyft as aligned itself with the right partners while continuing to build its network edge. On the other hand, the “bear” case can get us to $27. But given Lyft’s current positioning & momentum, anchored by our positive LT industry view, our bias is to the upside fundamentally. And with Lyft shares pulling back post-IPO, we regard the net-net risk/reward to be attractive.”
RBC Dominion Securities analyst Mark May gave Lyft an “outperform” rating and US$72 target.
Mr. May said: “Lyft is a strong #2 player in the growing U.S. ridesharing industry, with industry-leading growth rates. And we believe that Lyft has a reasonable path to profitability in the coming years.”
“We believe investors largely agree that Lyft (like Uber) faces a very large TAM. Controversies revolve around Lyft’s lagging competitive position vs. Uber and its path to profitability, this latter point highlighted by its expected $1B+ EBITDA loss in FY19. BUT, over the past 3 years, we have seen material leverage as each of Lyft’s four opex lines (O&S, S&M, R&D, and G&A) has declined as a percentage of Revenue (from 218 per cent in FY16 to 87 per cent in FY18). And we see 4 key paths to profitability: 1) Eventual rationalization in competitive dynamics leading to fewer Subsidies; 2) Long-term pricing power based on a compelling value proposition (as other major consumer Internet platforms have proven); 3) Insurance leverage (substantial portion of COGS) due to scale and experience curves; & 4) Expense leverage as the company scales.”
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Calling it “a gold business with high returns and organic growth opportunities,” Raymond James analyst Farooq Hamed initiated coverage of OceanaGold Corp. (OGC-T) with an “outperform” rating on Tuesday.
“Fundamentally, we believe that OGC has a strong balance sheet that can support future growth, a steady operating profile over the next few years that should generate FCF [free cash flow] at current commodity prices and an attractive suite of organic growth opportunities,” he said. “Comparing OGC to its intermediate gold producer peers, the Company has a superior track record of positive ROIC and ROE [return on invested capital and return on equity], positive NAV [net asset value] growth going forward versus a negative average for peers and a relatively strong balance sheet. On valuation, our analysis suggests OGC is trading at a slight premium to its peers however, we believe the premium could be higher given its comparatively stronger fundamentals.”
Mr. Hamed projects the Melbourne-based company to produce between 500,000 and 550,000 ounces of gold annually through 2021 while seeing both cash costs and all-in sustaining costs (AISC) decline as its Haile mine in South Carolina normalizes and capital requirements lessen.
“Beyond 2021, we are currently modeling a production decline caused by the end of mine life at Macraes, however, we believe there is potential for the development of the Golden Point underground at Macraes that would extend mine life and push the production decline further into the future,” he said. “Further growth in the period post 2021 would come from the incorporation of the higher grade Horseshoe underground deposit at Haile and the high-grade WKP deposit at Waihi.”
“While we currently model a production decline starting in 2022 as Macraes comes to the end of its life, we expect OGC’s total NAV to continue to grow as the Company would be in a cash harvest mode. We see potential for further NAV growth if OGC moves forward with the organic growth opportunities at Waihi (WKP) and Macraes (Golden Point) and from a potential new mine plan at Haile that delineates larger pits and the Horseshoe underground. The cash flow and production profiles also highlight that OGC would be well positioned financially and in a logical position to potentially pursue an external growth asset in addition to the organic opportunities.”
Mr. Hamed set a target price of $5.50 for OceanaGold shares. The average on the Street is $4.94.
“Overall, OGC trades at a slight premium to its midtier peers on a P/NAV basis (1.0 times versus group average of 0.8 times) and a P/CF basis (6.4 times versus group average of 5.1 times),” the analyst said. “Given OGC’s superior return and annual NAV growth metrics versus peers and its relatively strong balance sheet, we believe OGC is a premium company in the gold sector and should trade above peers suggesting that the slight premium still represents good relative value.”
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Citi analyst Timm Schneider reaffirmed TC Energy Corp. (TRP-T) as his “preferred” Canadian pick in the energy infrastructure in a research note reviewing its first-quarter financial results.
“We believe TRP’s acquisition of Columbia Pipeline along with execution of its current $30-billion backlog of projects will drive earnings grow through 2023,” he said. “We expect dividends growth to be in the middle of management guidance of 8-10 per cent. In addition, we are optimistic on the outlook for $58-billion Coastal GasLink project, given the advantages of LNG Canada – shorter shipping time, inexpensive gas, and large customer support. We also believe there is material upside from critical projects such as Keystone XL, Bruce Power, and opportunities within Mexico over the longer term despite political headwinds.”
Maintaining a “buy” rating for TC Energy shares, he hiked his target to $73 from $60. The average on the Street is $67.19.
At the same time, Mr. Schneider increased his target for TC Pipelines LP (TCP-N) to US$36 from US$32.50, which falls just short of the US$36.60 consensus.
He kept a “neutral” rating for TC Pipelines, which is managed by its general partner, TC PipeLines GP, Inc., a subsidiary of TC Energy.
“Our rating reflects our view that TCP’s asset will benefit from additional NG supply from the WCS production,” said Mr. Schneider. “However, we believe the valuation of TCP reflects the final FERC rule as it relates to TCP’s pipelines under reasonable assumptions. There remains uncertainty on the final implementation of the FERC policy.”
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Pointing to concerns stemming from the trade dispute between the United States and China and the expectation for “muted” iPhone upgrades ahead of the 5G technologies, Canaccord Genuity analyst T. Michael Walkley dropped his financial expectations and price target for shares of Apple Inc. (AAPL-Q).
“We believe Chinese consumers could slow Apple hardware purchases, leading us to trim our estimates,” he said. “We also anticipate increased input costs given the trade issues and have slightly lowered our gross margin assumptions. Further, our surveys indicate consumers are willing to hold onto iPhones longer, and we believe many could wait for new 5G technologies, leading us to lower our 2019 and 2020 iPhone estimates from 180M/190M units to 172M/185M units.
“Should the U.S. place a 25-per-cent tax on all Chinese imports to the U.S. with no exclusions, we would anticipate further cuts to our estimates. However, we believe Apple’s importance to both the China technology ecosystem through its Foxconn partnership combined with its importance as a leading U.S. company, we anticipate Apple should be able to navigate the tariff issues with potentially minimal impact.”
Maintaining a “buy” rating for Apple shares, Mr. Walkley trimmed his target to US$202 from US$245. The average on the Street is currently US$209.61.
“We believe Apple’s ecosystem approach including an install base which now exceeds 1.4 billion devices globally will drive strong long-term services revenue growth, and we expect the higher-margin services revenue growth to continue outpacing total company growth,” he said to justify a lack of a rating change.
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“Materially lower” steel prices could lead to “substantially reduced earnings and EBITDA” for United States Steel Corp. (X-N) as its cash commitments continue to grow, according to Goldman Sachs analyst Matthew Korn.
He downgraded his rating for the stock to “sell” from “neutral” with a target of US$11, falling from US$17 and below the US$15.73 average.
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In other analyst actions:
BMO Nesbitt Burns analyst Tim Casey resumed coverage of Corus Entertainment Inc. (CJR-B-T) with a “market perform” rating and $7 target. The average on the Street is $8.13.